How to Know When to Litigate

Back in the day if a person was wronged, a business defamed or promise unfulfilled, the offended party could challenge his opponent to a duel, meet at high noon, step off his paces, and pray to God that neither his opponent’s aim nor his pistol were more accurate than his own. Historically, we’ve too often solved disputes with threats or violence (or at least by sending Luca Brasi to make an offer they can’t refuse).

Believe it or not, our Constitution deals as much with how we should govern business as how we should govern ourselves. It endowed our legislature with the ability to regulate interstate commerce and established a judicial system for the civilized resolution of business disputes, although Hamilton and Burr apparently ignored that part.

At some point, every business will face the question of whether or not to engage that judicial system to enforce its rights. Most business owners answer this question in the simplest and broadest way: by asserting they will never be involved in litigation. They see litigation as a failure — if they are involved in a lawsuit, then they have already lost.

Conversely, I often hear clients say they have an “ironclad” contract and that I need only send a demand letter to make the other party pay up. In reality, however, a contract is only “ironclad” if a company is willing to enforce it in court — just as trademarks, trade dress or trade secrets are valuable only if their owners are willing to go to court to shut down an infringing competitor. So how does a business owner decide whether it is appropriate to file a lawsuit?

I often ask my clients to start by identifying the result(s) they want and to work backward from there. For example, suppose a trusted employee has left their company for a competitor. They are concerned the employee will divulge trade secrets to the competitor and undercut their pricing — although they haven’t seen anything on the market yet. Instead of asking, “What do I do?” I advise clients to instead ask, “What outcome do I want?” In this instance, three desired results come to mind:

1. Prevent the former employee from working for a competitor,
2. Prevent competitors and former employees from using any knowledge obtained while working for the client, and
3. Prevent the competitor from selling any products that compete with the client.

To obtain the first result, a company would need to determine whether the employee signed a restrictive covenant barring him or her from working for a competitor. If the covenant exists but was ignored, the company may be able to file a lawsuit, seek temporary relief (assuming it is provided for in the agreement), and achieve the desired result quickly and efficiently. If the employee has not signed a restrictive covenant, it becomes more difficult to achieve the desired result. So, in this scenario, the strength of the documentation may very well provide the answer.

To evaluate whether litigation will achieve the second result, we will need to examine the company’s intellectual property portfolio and any agreement or policy regarding trade secrets. If intellectual property registrations and trade secret policies are clearly defined and encompass the trade secrets in question, a letter informing both the competitor and the employee of the steps taken to protect those rights may suffice. However, if the policies are less clear, a longer and more expensive litigation process is likely. In this case, I would advise my client to consider whether the loss of business is worth the legal expenses likely to be incurred. The result of this calculation will help determine whether litigation is the best course of action.

The third result is appealing, but is often nearly impossible to obtain in a cost-efficient manner. There are certainly instances where a Goliath company has tried to put a David out of business by burying it in litigation. However, that story did not end so well for Goliath.

So, how does a business owner know if he or she should litigate? After identifying the desired result, I advise clients to address the following questions:

• Will a court order stop the other party’s actions without the plaintiff having to wait until the very end of the case?
• Will sending a threatening letter help avoid litigation?
• Is negotiation, mediation or arbitration a viable option?
• Is it possible to make a new deal to replace the one that’s gone wrong?
• What is the most effective path from problem to meaningful solution?

The result of this examination is a clearer evaluation of options. Put the effort into answering these questions first, and the rest of the pieces will fall into place.

Leon Silver is a co-managing partner in the Phoenix office of Gordon & Rees Scully Mansukhani LLP. He is a trial lawyer who was recently recognized as one of the Top 100 Lawyers in Arizona.